EU lining up emergency fund to stop ‘wolves’

BloombergMay 10, 2010, 06.30am IST

BRUSSELS: European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit to hammer out a lending mechanism for deficit-stricken nations . Jolted into action by last week's slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed on the backstop on Saturday and told ministers to get it ready before Asian markets open.

"We are going to defend the euro," Spanish economy minister Elena Salgado told reporters as she arrived to chair Sunday's Brussels meeting . "We think we have a duty for more stability for our currency. We will do whatever is necessary ."

Europe's failure to contain Greece's fiscal crisis triggered a 4.3% drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings's collapse. It prompted the US and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession .

"In the night, when the markets are opening, we cannot afford a disappointment," said finance minister Anders Borg of Sweden, one of 11 EU nations not in the euro. "We now see herd behaviour in the markets that are really pack behaviour, wolfpack behaviour."

European officials declined to disclose the size of the stabilisation fund, to be made up of money borrowed by the EU's central authorities with guarantees by national governments. The meeting started just after 3 pm and a press conference was scheduled for 6 pm. Some officials said talks could last longer.

ALTERNATIVE PLANS

"There is some discussion about what the solution will be," Dutch finance minister Jan Kees de Jager said. "There are several alternatives at the moment."

Separately, European Central Bank council members were slated to hold a teleconference on Sunday. "Europe is getting its act together," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "Time will tell if this statement is enough to satisfy the European bond market vigilantes."

Government officials said they won't push the independent ECB to, for example, buy government bonds. President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. Trichet is in Basel, Switzerland , on Sunday for a scheduled meeting of central bankers from the Group of 10 nations. Vicepresident Lucas Papademos is attending the Brussels talks.

STIFFEST TEST

With the euro facing the stiffest test since its debut in 1999, the weekend turned into a crisismanagement exercise to restore faith in the currency and prevent a European debt crisis from cascading around the world. The purpose is to "decide on a mechanism that enables us to assure the stability of the euro, stability in the zone and, beyond that, stability in financial markets" , French finance minister Christine Lagarde said.